Shell profit downgrade casts shadow over sale of Geelong refinery

Suitors for Shell's Geelong refinery have been reminded of the extremely challenging nature of the business, with the global oil giant revealing that conditions for the downstream industry have worsened over the past year.

The refining segment of Shell's business was one of several highlighted in a significant profit downgrade announced late on Friday night in Europe by the company's new chief executive, Ben van Beurden.

Mr van Beurden revealed that December quarter profits had almost halved compared with the same quarter in 2012, on the back of higher exploration costs, poor conditions in refining and other ''downstream'' businesses.

The profit warning was Shell's first in almost a decade, and will help drag the company's full-year profits for 2013 lower than the previous year when they are reported later this month.

''Compared with the fourth quarter 2012, downstream earnings, excluding identified items, were mainly impacted by significantly weaker industry refining conditions, in particular in Asia Pacific and Europe,'' the company said in a statement.

Given Shell formally put the Geelong refinery on the market in April 2013, Friday's announcement suggests the market conditions for the 60-year-old asset have deteriorated since the decision to sell was made within the company.

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Swiss group Gunvor, Dutch energy trader Vitol and private equity firm TPG are believed to be circling the sale of Shell's downstream assets in Australia, according to recent reports in The Australian Financial Review.

The downstream division includes a network of petrol stations as well as the Geelong refinery.

Shell has said it will convert Geelong into a fuel import terminal if a buyer cannot be found by the end of 2014. That outcome would likely see dramatically fewer people employed on site than the 500 that currently work there.

The move followed Shell's conversion of the Clyde refinery in Sydney in 2011, and rival Caltex's decision to close the other Sydney refinery at Kurnell in 2012, and demonstrates the struggle that Australian refineries are having amid competition from larger, newer and cheaper refineries in Asia.

Shell's upstream business, which covers oil and gas exploration and production also disappointed, with maintenance dragging down the volumes of oil produced.

The weakening of the Australian dollar was also named as a factor that hurt the bottom line, with Shell having exposure to a suite of assets in Western Australian waters, including the Browse project in partnership with Woodside, the Prelude floating LNG project and a minority interest in Chevron's Gorgon.

It also has a share in the Arrow Energy coal seam gas business in Queensland, and Brewin Dolphin analyst Iain Armstrong said the company was gradually becoming more frugal.